Shapiro Metals – April 2023 Market Insights

MARCH MADNESS ENDS. ECONOMIC MADNESS DOES NOT. 

The adage is, “The Fed tightens until something breaks.”  SVB and other banks broke.  Shortly afterward on March 22, the Fed announced a 25-point rate hike. Powell stated, “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain,”

Trying to fix this economy only using monetary policy is extremely difficult and unrealistic.  A 2% inflation target boxes in the Fed. When Paul Volcker brought down inflation in the late 1970s, and early 80s, he declared that inflation was under control when it got to 4%.  In 2012 someone said it needed to be 2%.  For those who are golfers, it would be the equivalent of making the golf hole smaller.  Crazy.

THE ECONOMY AND THE RECESSION 

Economy is still strong, with abundant recession forecasts in the next 12 months 

The Atlanta Fed just forecasted their flash GDP for Q1 at 3.2%.  We won’t know if that is correct for a while, but it is much higher than previously thought.  The Fed is forecasting 0.4% growth in 2023.  Getting to an annual 0.4% growth rate after a strong Q1 and slower growth rates in Q2 means that GDP for the year’s second half would be negative growth.  Two quarters of negative growth is the definition of a recession.  The Fed forecasts that unemployment averages 4.5% in Q4 versus 3.5% in March.  

• Employers added 265,000 jobs in March after adding 311,000 jobs in February.
• Unemployment dropped 0.1% to 3.5%, mainly because more people were looking for jobs.  Over 72% of those jobs were in education, healthcare, leisure and hospitality.
• Wage growth over the last three months moderated as the seasonally adjusted annualized rate fell to 3.2% from last month’s 3.6%.
• The Fed believes that with the recent bank turmoil, higher interest rates and tighter money will slow the economy.

Getting back to 2% inflation will take a long time.  Interest rates must go higher and stay there for a long time.  Demand will eventually fall, and the economy will go into recession.  The unemployment rate will rise, and there will be pain in the economy.

On the other hand, this economy is still growing.  The lower wage growth over the last three months is already near pre-pandemic norms and consistent with the Fed’s inflation goals of 2%.  Jonathon Levin states, “If you assume a 2% inflation goal and 1.5% productivity growth, it signals the Fed should accept anything under 3.5%.”  But the Fed won’t say that, and yet maybe, there is light at the end of the tunnel.

INFLATION  

Economy remains strong while inflation moderates

The Consumer Price Index (CPI) for March fell to 5.0%  from a year earlier, which is the lowest in 2 years,  and below the 6% annual rate in February,  The core CPI, excluding food and energy, eased to 5.6% annually but was up from February  5.0% on an annual basis.  The core CPI was up 0.4% monthly from 0.5%  February,.  Much of the inflationary pressure is still shelter related.  In general this is a good report.

• Personal Consumption Expenditures [PCE], the Feds preferred tool for measuring inflation, rose 0.3 in February down from January 0.6% and are up 5.0% for the year ago from the previous month’s 5.4%. Core prices, which exclude food and energy, are up 4.6% on an annual basis and about the same as the precious month.
• Super Core inflation, the Fed’s new preferred PCE sub-indicator, services only (no goods), excluding food, energy, and housing, were significantly down as they increased by 0.2% in February from a 0.6% rise in January. These prices are still up 4.6% from a year ago and the same as January, showing very little progress versus the 5.0% gain in the twelve months ending in January 2022.
•  The Producer Price Index for March fell 0.5% from February, which is the most since the start of the pandemic.  On an annual basis it rose only 2.7% and was driven down by the cost of fuel.  Excluding food and energy, the core PPI fell 0.1% and increased 3.4% from last year.  This is good news in the outlook for inflation.
• March job openings started falling, and was over 600,000 lower than February.  There are still almost 10 million openings and about 1.7 job openings for every unemployed American, down from 1.9 the month prior but well above the 1.2 level seen pre-pandemic.  Headline news is still about large companies and the tech industry layoffs.  Small companies and the service industries are still actively hiring.  At some point this year, this will slow down.  Until then, it is very difficult to slow inflation in this environment.

MANUFACTURING 

Mixed signals continue

The ISM manufacturing index for March dropped to 46.3 from 47.7 last month and is still in contraction.  In fact, all the 18 sub-components of the ISM manufacturing index are in contraction. Only 6 improved in March, making this the lowest reading since the end of the Great Recession in 2009 (excluding the early pandemic).

This sounds bad, yet global steel demand is at an all-time high, according to Swedish steel producer SSAB.  The demand is mainly coming from the defense and infrastructure industries.  Lost production in the Ukraine and Russia hurt supply which brings upward price pressure.

• Industrial production for February ticked down, and ITR has not changed its forecast.  ITR uses a long-term 12-month moving average [MMA] and expects a decline to start late this year and go through late 2024. The decline will be mild due to stable consumer and business finances, backlogs, and onshoring trends.  It then calls for the 12 MMA to rise in 2025.
• Shipments of “core” non-defense capital goods ex-aircraft (an essential input for business investment in calculating GDP and a leading indicator for manufacturers) were unchanged in February after rising 1.1% in January.   If unchanged in March, these shipments would be up at a 2.0% annualized rate in Q1 versus the Q4 average, and good news for Q1 GDP.
• Orders for core capital goods (excluding aircraft and transportation), which will lead to shipments in the future, were also unchanged in February after rising 0.7% in January.   Producer prices for capital equipment are up 7.1% during the same period, which means that while orders are still rising in dollar terms, they are declining when adjusted for inflation.
• Car sales based on Q1 are estimated to be 14 million annualized.  Based on estimated March sales, they are at 14.8 million.  That is up from 13.7 last year.  The supply chain is improving and dealership inventories are higher but still below average pre-pandemic levels.
• Aircraft production continues its upward trend.
• Construction is weird.  Despite higher mortgage rates and home prices, sales continue at a decent pace, and new permits are up for single homes.  There is still a housing shortage while nonresidential is improving.  Still, total construction spending is up by 5.2% year-over-year.
• The Shapiro Nonferrous Scrap Activity Index for March, which tracks our daily purchases for the duplicate accounts across our 10 locations and a diverse industrial base, fell 3% from February and is flat from our 12-month trailing average.

CHINA AND THE WORLD 

Services rebound and manufacturing is barely in expansion

Many Chinese consumers are avoiding big-ticket purchases amid an uncertain economic outlook. China manufacturing PMI for March dropped to 51.9 from 52.6 in February.  The Caixin index fell to 50 from 51.6.  China’s services sector reached its highest level in over a decade in March.  This was a reaction to the end of three years of Covid restrictions as Chinese consumers were heading back to stores and restaurants.

China’s real estate market is improving slightly but still has major problems with too much inventory and buyers who are not confident with the economy.  Also, with lower mortgage rates, many Chinese pay down their mortgages instead of spending. China’s manufacturing steel demand for the January/February period fell to its lowest level in 30 months.  Some believe that infrastructure spending will help if it can be funded.

China will continue to have economic issues. GDP forecast is 5% growth after last year’s covid restricted 3%.  But the government controls everything ,and ultimately, the party’s absolute priority is maintaining social stability.  If the economy is slower this year, China has the power and the money to change policies when President Xi. The Zero Covid changed overnight without any warning, and so can economic policies.

Eurozone core inflation, which excludes food and energy, hit a new high of 5.7% in March, up from 5.6% in February. Separately, the Eurozone final March manufacturing PMI came in at 47.3 from February’s 48.5. Germany’s IFO, manufacturing index, rose in March for the fifth straight month to 93.3 from 91.1 last month.  While still in contraction, it is looking better.

METALS 

Overall demand for primary aluminum this year through February is very close to last year. There is a higher demand for auto and aero alloys, while extruded products are down almost 10%, and can stock is also down.  The supply side is also in balance although inventories are low.  This is keeping LME prices in a tight band.

Ed Meir from Marex states, “Chinese production has been trending lower on account of environmental and power restraints, while domestic consumption is starting to pick up and should therefore soak more of the metal that otherwise would have been exported.”  The negative Chinese real estate market will continue to be a major factor on metal demand and prices.

Harbor believes that world primary aluminum will be in surplus this year and next while the demand is dropping.  World demand is down 2.4% year over year for the Jan-Feb period and down 6% for the western world in the same time period, according to Harbor.  The only bright spots are automotive and aerospace.  Can stock and common alloys have been soft.

Metal prices trended down in March.  Prime aluminum prices fell 3 cents month over month, mainly due to the Midwest premium drop as the LME held steady.  Prime scrap prices fell along with the prime. The primary aluminum mills and extruders have plenty of metal and have decreased their spot buys for common alloys and extruded scrap.  While the primary scrap demand is lower, our diverse industrial scrap base continues to be steady and has not fallen off.

Secondary aluminum was steady.  Meanwhile, secondary 380 aluminum, the most common alloy, is selling for more than 10 cents over primary.  This extraordinary circumstance, which has rarely happened, is mainly due to the high cost of additives like silicon and copper.

Copper prices also fell slightly.  Nickel and scrap stainless steel prices were down 10%.  Steel prices are the same.

GOOD NEWS/BAD NEWS 

The ChatGPT King Isn’t Worried, but He Knows You Might Be

AI is artificial intelligence.  AI has been compared to the start of electricity.  Computers will be capable of teaching other computers to “think” at exponential speed.  This will enable computers to solve scientific and health problems that were not possible years ago.  Unfortunately, it could also put the knowledge of making very bad things happen when bad people use it.  It is very VUCA.

ChatGPT came out a month ago.  It has already attracted 100 million queries.  Microsoft put in a billion dollars into ChatGPT 4 years ago and is now up to $13 billion.  I am attaching an article about the founder of ChatGPT and what he believes will happen with AI.  The problem is no one really knows.